Financing your business jet purchase

Industry experts continue to blame lack of financing for the failure of business jet orders and sales to recover more rapidly since 2008. “Many sales are lost because prospective buyers can’t obtain financing or can’t obtain it on favorable terms,” says Andrew Bradley, president of global sales at Avjet Corporation. Bradley has even seen a bank require its client to buy a newer, significantly more expensive aircraft rather than provide financing for a slightly more than 10-year-old airplane of the same model. Indeed, relatively few business jets acquired last year were financed at all.

You can’t blame interest rates for financing deals not getting done. Ultra-high-net-worth individuals can still typically borrow to purchase a business jet at floating rates as low as 2 percent per annum and at fixed rates as low as 3 percent. Fixed rates are popular now among buyers trying to lock in favorable terms on large-ticket purchases. Jim Simpson, who heads up aviation finance at First Republic Bank, says 80 percent of his aircraft-loan clients recently have chosen fixed rates.

If rates are good, where do buyers run into financing woes? Perhaps the biggest issue is that lending institutions today prefer to finance newer aircraft. You can still buy 1960s-vintage jets, but don’t count on your bank to help you do so. During the past four years, the average time to sell a Gulfstream GII has exceeded 400 days, so no bank wants to have to foreclose on an aircraft like that, let alone lease it to a customer. Though some financial institutions will consider lending on almost any jet, most want the aircraft to be no older than 20 years when the financing ends, and some shun financings for airplanes older than 10 years. That doesn’t mean you can’t finance an older model, just that you have to find institutions willing to take on those projects. Banks are also looking for shorter financing terms and amortizations and big down payments—5 to 20 percent or more of the aircraft’s value.

The first step to a successful financing is to buy the aircraft right. Banks today are paying special attention to the value of financed airplanes as collateral. In a recent transaction, for example, a bank valued an aircraft for several million dollars less than the buyer was paying and structured the financing accordingly. Consider retaining an acquisition consultant to help assure you (and your bank) that you’re getting a good deal on the aircraft.

Lenders are equally picky about customers. Changes in banking regulations will only underscore the importance of the credit quality of borrowers. Banks will need to keep greater credit reserves to make aircraft loans to lesser credits, rendering those financings more expensive. The best aircraft deals will go to investment-grade credits with a longstanding relationship to the lender, assuming the lender doesn’t already have too much credit exposure to the borrower. That’s one reason it usually makes sense to start your search for aircraft finance by contacting your existing bank.

If you’re a high-net-worth individual, that generally means calling on your private bank, assuming it has jet finance expertise. Not only does the private bank already have a fix on your financial position; the rates offered are often extremely competitive. The downside is that many private banks will want the aircraft to serve as collateral for (and the loan to cross-default to) other private bank loans to you and vice versa.

On the other hand, if you want lease financing for the aircraft instead of a loan, you won’t find it at your private bank; you’ll have to go to institutions that make aircraft leases a specialty. Public companies often choose leases because they help keep the aircraft off the company’s balance sheet. That’s not a concern for individuals, but leases offer them other advantages. Although individuals find it hard to use the tax advantages of depreciating an aircraft, financial institutions in the business of leasing jets can use the tax deductions against their leasing income—a benefit they typically pass on to the lessee in the form of lower financing costs. Further, as the owner of the aircraft, the bank assumes the risk that its value could plummet over the lease term.

An issue to consider with both leases and loans is how to get out of them. Suppose after a couple of years you decide you aren’t using the aircraft enough and would like to unload it. If it is leased, you may not be able to terminate the contract even by paying a penalty, and you may be forced to wait for your next leasehold “early buyout” opportunity or even the end of the lease term. If the early-buyout price is unattractive, the lessor will rarely be open to renegotiating the number.

But aircraft loans have similar problems. Most require you to fork over a hefty penalty for paying off the loan in the first two or three years, and if the rate is fixed using an interest-rate swap agreement, you may face breakage fees for early termination, depending on where rates are at the time.

Another trap that has surfaced more frequently in aircraft loans is the “loan-to-value” covenant. This requires you as the borrower to guarantee that the fair market value of the aircraft remains at some percentage (often 100 percent) of the loan amount. When the airplane’s market value declines faster than the loan amortizes, you trip the covenant and must either pay down the loan or put up additional collateral to bring the loan back into compliance.

Negotiating with your bank on such issues can be difficult if your loan has to fit into the institution’s pre-established standard aircraft underwriting program. Citi Private Bank’s Ford von Weise notes, however, that business jet loans for high-net-worth individuals “never perfectly fit a standard ‘out-of-the-box’ program.” The requirements of ultra-high-net-worth private bank clients vary widely. “Someone who is worth more than $500 million ought to be able to monetize enough net worth annually to handle a $20 million aircraft loan, regardless of how his cash-flow picture might appear under a traditional consumer-oriented program,” says von Weise, who heads up Citi’s Global Aviation Finance Group. As a result, if you meet the bank’s new verifiable-net-worth requirements, Citi can deploy more flexible aircraft lending guidelines to accommodate the unique needs of very wealth buyers.

If you’re having trouble financing a jet, you may simply be talking to the wrong institutions. Some banks are basically open for aircraft business only for their existing clients, though they may make an exception if they think they can get more business from you later. Ultra-high-net-worth individuals and companies with investment-grade credit will do well at institutions looking for those customers, while many less-well-heeled borrowers should seek out lenders specializing in asset-based finance with a willingness to structure customized financing arrangements. Different institutions have different niches and requirements, and with a little effort, you should be able to find the right one for you.

Jeff Wieand is a senior vice president at Boston JetSearch and a BJT columnist.

Comments

Given what has been said regarding the financing situation in the private jet marketplace, there are some planes out there that might not be a severe financial burden. For example, Sirrus's SF50 bizjet according an AIN article is priced below two million dollars. Another new jet that might be attractive would be Honda's new jet, which is priced a little below five million according to a news article.

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“[New billionaires in fast-growing countries] have to buy longer-range airplanes. If you’re flying from Mongolia to Nigeria, it’s either a three-day journey flying commercial or a nine-hour flight on your jet.”